First-Time Homebuyer Grants: Here’s What to Know

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The time has come to buy your first home – congratulations! You may, however, need some assistance on the road to home-ownership. We’re here to help.

Searching for your first home whilst also considering the multiple mortgage lenders available can be a stressful task for the inexperienced first-time buyers among us. Even for the experienced ones, it might still be quite the task. On the other hand, as we explain below, even if you are not a first-time buyer you can still be eligible for first-time homebuyer grants.

First-Time Homebuyer Grants

Be in the Know: First-Time Homebuyer Grants

The purchase price for buying a home is often one of highest costs you will pay in your lifetime and this is where a homebuyer grant or one of the many first-time buyer programs would come into play. A grant can come from many sources, but its purpose stays the same – it is a gift of financial aid with the aim of giving you a head start. Assistance can also be offered in the form of certain mortgage program, though the eligibility requirements differ depending on the one you wish to apply for.

Eligibility Requirements

A first-time buyer is, as the name suggests, someone who is looking to buy housing for the first time, however if you have not owned a property within the past three years then you may still qualify for a housing grant. First-time homebuyer grants are a great tool for low-income people.

You should note that grants are only applicable for your primary residence and are not valid for investment properties or second homes. Additionally, income limits do apply and usually grants are only available for lower income families, meaning your household income is lower than the area median income.

We do intend to educate you on what is required for securing a housing grant though some schemes may insist that you attend homebuyer education – a course designed to educate you on all of the aspects of buying your first home. Even if it is not required, it may be a good idea for you to attend such course so you can be informed on what terms you are agreeing to. It may also be a compulsory request from mortgage lenders to ensure you are ready to accept the responsibility of becoming a homeowner as well as a way to ensure their loan is in good hands.

What is a Mortgage?

It is assumed that if you are looking for a grant then you know what a mortgage is and how it works. For those who don’t, however, let us explain.

First-Time Homebuyer Grants

A mortgage is a type of loan that is offered to raise funds for housing. It can also be used by existing property owners to raise funds for other reasons. A mortgage loan is offered on the basis of being paid back plus interest. A standard mortgage program would require a down payment to secure the loan though there are exceptions to this that we explore below. The most popular type of mortgage is a fixed-rate mortgage.

Fixed-rate mortgages are mortgages that are issued over 15-, 20- or 30-year terms with a fixed rate of interest. Mortgages are usually paid via a monthly payment for the number of years agreed. In case you have the funds available at a certain time, it is possible for the loan to be paid off sooner, saving you the interest expense you pay with the monthly mortgage deposits. Shorter term agreements usually mean low-interest loans, while a 30-year mortgage scheme would tend to have a higher interest rate to protect the participating lenders.

What is a Credit Score?

A credit score is a risk assessment method that is used to assess a person’s reliability on paying off their debt. The most popular form of credit score is the FICO score. Your score is calculated on a number of factors, including your ability to make payments on time, how much outstanding debt you owe and the rate at which you have made payments back of outstanding amounts. A higher credit score will give you access to better mortgage rates as lenders can trust that repayments will be made. A score of 700 or higher would usually secure a better interest rate, however, as discussed below, there are loans available to you if your score doesn’t reach that mark.

You can request a free copy of your credit report from each of the three major credit reporting agencies – Equifax®, Experian®, and TransUnion® – once each year at AnnualCreditReport.com. It is smart to request a report from each vendor and read through it in detail to ensure there are no mistakes that may affect your score. If there is an error, you can dispute it within 30 days of receiving your report.

Credit Score

Offices to Apply for First-Time Homebuyer Grants

Now that we have an understanding of what a grant actually, is along with how it is related to a mortgage, let’s explore how you’d go about securing one.

The first place you should start looking for a grant would be with your local government offices. The Department of Housing and Urban Development will have a list of programs and grants available for your state, however the mortgage lenders themselves may also be able to assist you with more popular programs.

You should consider that not all grants are available at all times as some may run out of funding. If you are set on a particular grant, then check with the registered sponsor to confirm when that grant will be available again. 

Once you have found a program that suits your needs, check the requirements. We have gone into detail on some of the requirements for the more well-known programs, however the terms and income limits may differ per state and your preferred choice. The next step is to find an approved lender. Again, a list of these is normally available at your local government offices.

The final stage in the process is filling out your application report. There will be questions concerning your income as well as employment history along with other financial information. Depending on the type of grant or program you are applying for, there might be a requirement for a credit report to be provided to ensure your reliability as a borrower.

Grants and Programs for Each Individual User

There are several grants or first-time homebuyer programs that can help you purchase housing and thus give you a lift onto the first rung of the property ladder.

FHA Loan program

FHA loans have helped more first-time homeowners than any other type of mortgage loan program and your chance to be accepted for one is much higher than a traditional mortgage due to the flexibility of the loan. FHA loans offer higher loan-to-value ratios when compared to conventional loans. The loan-to-value ratio is what lenders use to assess the risk of the loan they are issuing.

The FHA mortgage program is often seen as the main first-time homebuyer loan, though it is recommended to have worked on your credit score before applying for a FHA loan (see here for tips on improving your credit score). A score of 580+ would make you eligible for a down payment of only 3.5% and due to flexibility of the loan, that down payment can be a gift from a friend or family member meaning this loan is one of the easiest to qualify for.

USDA Loans

This particular home loan program comes from the US Department of Agriculture (USDA) and is suitable for prospective homebuyers with an average or lower income. It comes with a certain criterion to be met before you qualify, being only applicable to those looking to purchase housing in rural America. But don’t be put off by that statement, because about 97% of the country is considered eligible for a USDA loan.

This type of loan is perfect for a low-income family looking to achieve first-time homeownership as no down payment is required.

FHA 203k Loans

An FHA 203K loan or rehab loan may be a perfect fit for you if your first property choice needs some love and care. It acts the same as the above FHA loan but also allows an amount for refurbishment, which the lenders then package into one loan.

Often, housing that requires extra work is listed at a cheaper price, but a credit score of 640 or more is required to be eligible for this type of loan.

Home Loans

Good Neighbor Next Door Program

Are you a first-time buyer that is employed as a fire fighter, police office, emergency medical technician or teacher? If so then you qualify for this first-time buyer program. The program reduces the cost of housing by 50% and only requires $100 as a down payment. These loans are offered by the Department of Housing and Urban Development or HUD. Eligible properties can be found on their website.

VA Loans

The Veterans Administration offers homebuyer assistance programs for both active and retired veterans. A VA Loan requires no down payment making the associated upfront costs of getting a mortgage loan greatly reduced. This type of loan is one of the cheapest as no mortgage insurance is required so if you are eligible for it, it is in your interest to make an application. A credit score of 620 or more is required to be eligible for this type of loan.

MCC

A MCC or Mortgage Credit Certificate is a federal tax credit that is equal to 20% of the mortgage interest paid during the tax year. A mortgage lender may be able to provide this to you. Unfortunately, there are no fixed terms for this program as they differ per state. You are required to submit an application costing about $650 in upfront costs and additional processing fees. The federal tax credit may seem like an advantage, however you many end up disappointed with their application as the IRS impose strict income limits. It is much easier for a single occupant to be accepted over single-family homes or couples due to the lower income.

Despite the assistance available, not every mortgage provider will be able to approve your first-time purchase if you are using a grant or other form of assistance. Always check with your loan officer before making any commitments to real estate. If you can confirm you are able to use a grant for your mortgage, then check with your appointed officer as they can often point you in the direction of a suitable grant. The easier your first purchase can be the better.

Hidden Risks With First-Time Homebuyer’s Grants

So far, a grant or one of the above programs may sound like your best option as a first-time homebuyer but be warned: they don’t come without risk.

Firstly, even if you are eligible for a housing grant, are you really ready for one? Despite the assistance given there is still interest to be paid back and closing costs depending on the type of grant. A home is a big commitment. Will your emergency funds cover the mortgage payments if something goes wrong and you lose your income?

Beware of Recapture Tax

Another possible risk is recapture tax. We need to stress here that this should not be a concern that can flip your decision to take financial aid for your home purchase. Recapture tax is a potential payment of the savings that the grant/program has provided. This is enforced by the federal government however it should not be a reason to stop searching for a grant, at least not before you have a better understanding of how it applies.

First and foremost, it is not a fixed term and there is only a small chance that you will be required to pay back this tax. The law is in place to only recapture tax from home-owners that no longer require the savings. Payment of recapture tax will only apply if 3 terms are met:

  • You sell your new house within 9 years of purchasing.
  • You make a profit on the sale of your home.
  • You establish a substantial increase in median income.

Is a First-Time Homebuyer Grant for Me?

If you are a part of a low-income family or meet any of the criteria for the above-mentioned programs, then there is no shame in asking for a help in getting on to the housing market – just as long as you are ready for that commitment.

These programs are in place to give those with a moderate income a chance for achieving the great American dream. Though there is recapture tax to consider, the chance at owning your first property outweighs the risk and as long as you are informed on the terms of recapture tax then you know how to avoid it.

You should definitely consider a grant as a viable option, and if you have kept up on your credit score it will be even easier to secure a grant, and then a mortgage, for your first home. One of the biggest obstacles for middle- and low-income people is providing a down payment for the mortgage. There is often little room in your savings to allow for the extra expense that comes with a mortgage loan. No one should be denied homeownership and that is why there are such programs available.

Did your dream of owning a property seemed out of reach until now? Will you be applying for a grant? Which program does look most appealing to you? Maybe you have tips to share on how to avoid the scary recapture tax if you’ve been through the process already. Tell us below!

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M. Pedrick
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M. Pedrick

Thanks Timothy. We are what we consider a low to median income couple. Presently we are owners of a triple-wide Mobile Home which is free & clear. Does that ruin our chances to apply for assistance as first time homebuyers? We will not be ready to buy for at least another year as we are presently in the process of eliminating credit card debt & raising our credit score. Timothy, you have given us a lot of invaluable insight & we appreciate it. God bless you for the awesome work you do. Thanks again!

Yvon Pellerin
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Yvon Pellerin

Frist time looking, for help on a home , no $$ down looking for a 2 bed in dracut ma

Justin Martinez
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Justin Martinez

I’ve already owned and lost my first home to devorce. Not anywhere close to looking to buy a home. I’m actually homeless at this point and SS is taking $170. From me this month because I worked and made to much money this month!!!

Terry Melvin
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Terry Melvin

Thank you for this information, My family had a 17 acre farm that is condemned. I am finding it hard to find a place to stay. I am disabled and I also have a nonprofit. My father is diseased and there is potential settlement monies available, please help.

LindaJones
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LindaJones

Like to have a new “home” This apt is driving me crazy!! Miss my dog,porch and flowers. Due to illness and extra money it is hopeless. Still trying my best. Help

Ken Dennis
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Ken Dennis

Hello, i am a Veteran and i’m on disability. I have two years before i can officially retire. I would love to own a home to officially retire in. My credit score is low and i don”t have money for a down payment. This is a house i would like to buy, however it does need some TLC. Which program would be the best for me?

Karen
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Karen

Thank you Tim

Demarlo Rhodes
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Demarlo Rhodes

I’m looking for a 2 bedroom home for my self in a working low income 45 year old male single .. Low credit score on the way to improve soon with a little TLC and budgeting .. Should change to a better credit score by 2020 after Jan or feduary .. Can you help me need guidance or advice ..